Singapore's 'sorpasso' to cause soul-searching in HK

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Italians used to brag about 'Il Sorpasso' - the point in 1987 that Italy overtook Britain to become the world's fifth largest economy.

Well, this year Singapore looks set to celebrate a sorpasso all of its own. According to forecasts from the International Monetary Fund, 2012 will be the year in which Singapore's economy overtakes Hong Kong's.

As the first chart shows, Singapore's nominal gross domestic product is expected to hit US$254 billion this year - a full US$10 billion greater than Hong Kong's output.

For Hong Kong the news is likely to come as an unpleasant shock. For decades, locals have been used to thinking that in economic terms they were bigger, brasher and altogether more virile than their near-neighbour in Southeast Asia.

It seemed the natural order of things. After all, while the two economies are superficially similar - both are small, predominantly Chinese cities with advanced open economies that depend heavily on international trade - Hong Kong is almost twice the size in terms of land area. And until the mid-1990s Hong Kong had a population nearly twice as great as Singapore.

But the old certainties have shifted in recent years, and not just because Singapore has grown physically, adding 30 square kilometres to its land area through massive reclamation projects.

Singapore's population has also expanded rapidly, growing from three million to five million over the past 20 years thanks to heavy immigration. Today Hong Kong's population is only around a third bigger than Singapore's, and the gap is expected to narrow further over the next five years.

Even so, population growth alone cannot explain the speed with which Singapore has caught up with Hong Kong. There are not just more Singaporeans, they are richer, too. As the second chart shows, Singapore's per capita GDP economic output surpassed Hong Kong's as long ago as 2004. This year Singapore's GDP is forecast to top US$48,000 per head, 40 per cent higher than Hong Kong's relatively meagre US$34,000. As a result, when it happens the Singapore sorpasso is sure to cause an agonised bout of soul-searching in Hong Kong.

Some people will see Singapore's success as evidence of the superiority of the city's state-directed industrial model. Governments really can pick winners, they will claim, arguing that the Hong Kong government should lavish subsidies on favoured sectors of the local economy. Others will see Hong Kong's sluggish performance as proof that it has failed to make the most of its ties with the rapidly growing mainland economy, and that the city is becoming marginalised. The answer, they will say, is to abandon exceptionalism and to integrate Hong Kong ever more closely into the mainland's development.

And some will argue that Hong Kong has fallen behind because of the way its economy has been carved up by a cartel of rent-seeking tycoons determined to protect their own positions by crushing all competition, which naturally stifles innovation and growth.

Others still will blame Hong Kong's currency peg to the US dollar. They will argue that the gain in Singapore's per capita GDP relative to Hong Kong's can be explained entirely by the crushing deflation the peg inflicted on Hong Kong as the local economy struggled to adjust following the Asian crisis, coupled with the Singapore dollar's 45 per cent appreciation against the Hong Kong dollar over the past 10 years as the Hong Kong currency has been dragged down by a weakening US dollar.

But Hongkongers shouldn't be too disheartened. Within a few years of the original 1987 sorpasso, Britain had overtaken Italy once more. Singapore's lead over Hong Kong is likely to be similarly short-lived. The IMF expects Hong Kong's economy to surpass Singapore's once again as soon as 2013. All the soul-searching will be a waste of time.